(1) Sunk Cost : Sunk cost is one which is historical or past costs and has already been incurred. Such a cost cannot be changed by any decision even if the management wishes not to incur. Investment in plant is such a cost which has to be used or kept idle though not required by the present activities of the organization. Whatever expenses are to be incurred in this connection, shall be termed as sunk cost. This cost is not useful for decision making as all past costs are irrelevant. It has also been defined as the difference between the purchase price of an asset and it salvage value.
(2) Opportunity Cost : Opportunity cost is the selecting one course of action and the losing of other opportunities to carry that course of action. Here the cost of producing a quantity of one commodity is measure in terms of the quantity of some other commodity that could have been obtained instead. The opportunity cost arises because of the problem of scarcity of resources and the fact that resources have alternative uses. According to FERGUSSON, “The alternative or opportunity cost of producing one commodity X is the amount Y that must be sacrificed in order to use resources to produce X rather than Y”
Example. It is the sacrifice of one commodity to achieve the other commodity e.g., : Want to become a IIT graduate rather than becoming a CA. It is important to note that opportunity cost of producing goods is not any other alternative goods that could be produced with the same resources; rather it is the next best alternative goods that could be produced with the same resources. Opportunity costs are not recorded in the books. It is important in decisionmaking and comparing alternatives.
